BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 1371


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          Date of Hearing:  May 18, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 1371  
          Lackey - As Amended April 20, 2015





          Majority vote.  Tax levy.


          SUBJECT:  Personal income taxes:  deduction:  education  
          expenses.


          SUMMARY:  Allows an "above-the-line" deduction for the cost of  
          education-related expenses of a taxpayer's dependent child  
          attending public or private school, not to exceed $2,500.   
          Specifically, this bill:  


          1)Allows an "above-the-line" deduction, beginning on or after  
            January 1, 2016, and before January 1, 2021, for an amount  
            equal to the qualified amount that was paid or incurred for  
            qualified education-related expenses for one or more dependent  








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            children by a qualified taxpayer during the taxable year.


          2)Defines "dependent children" as one or more children that meet  
            all of the following:


             a)   Attended Kindergarten or any Grades 1 through 12 in  
               California at a public, charter, or private school that has  
               a current private school affidavit on file with the State  
               Department of Education in the taxable year;


             b)   Are deemed to be a full-time pupil in accordance with  
               the compulsory education requirements of Education Code  
               Section 48200 and 48222;


             c)   Are under the age of 21 at the end of the school year;


             d)    Meet the requirements of Internal Revenue Code (IRC)  
               Section 152(c)(1)(D) and (E); and,


             e)   Are claimed as dependent children on an original, timely  
               filed return of the qualifying taxpayer.


          3)Defines "qualified amount" as the amount paid or incurred for  
            qualified education-related expenses, not to exceed $2,500.


          4)Defines "qualified education-related expenses" as the  
            following costs, incurred for Kindergarten or for any Grades 1  
            through 12:


             a)   Textbooks;








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             b)   School supplies, which include, but are not limited to,  
               pens, paper, pencils, calculators, and rulers;


             c)   Rental or purchase of educational equipment required for  
               classes during the regular school day;


             d)   School uniforms that are not part of a co-curricular  
               activity;


             e)   Computers, computer hardware, and educational computer  
               software used to learn academic subjects;


             f)   Fees for college courses at public institutions or  
               independent nonprofit colleges, or for summer school  
               courses that satisfy high school graduation requirements;


             g)   Psycho-educational diagnostic evaluations to assess the  
               cognitive and academic abilities of dependent children;


             h)   Special education and related services for dependent  
               children who have an individualized education program or  
               its equivalent;


             i)   Out-of-school enrichment programs, tutoring, and summer  
               programs that are academic in nature; and,


             j)   Public transportation or third-party transportation  
               expenses for traveling directly to and from school.









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          5)Provides that "qualified education-related expenses" shall not  
            include any expenses for the items listed under the definition  
            of "qualified education-related expenses" that are used in a  
            trade or business.


          6)Defines a "qualified taxpayer" as a parent or legal guardian  
            of one or more depended children who meet all of the following  
            requirements:


             a)   Both dependent children and the parent or guardian  
               reside in California when the qualified education-related  
               expenses are paid or incurred; and,


             b)   The household income does not exceed 250% of the federal  
               Income Eligibility Guidelines published by the Food and  
               Nutrition Service of the United States Department of  
               Agriculture for use in determining eligibility for reduced  
               price meals.  "Household income" means adjusted gross  
               income as defined by IRC Section 62. 


          7)Provides that the deduction may not exceed $2,500 in a taxable  
            year.  If more than one qualified taxpayer may be allowed this  
            deduction for dependent children, including a qualified  
            taxpayer filing a joint return, the sum of all deductions  
            allowed under this section for those dependent children shall  
            not exceed $2,500 in a taxable year.


          8)Provides that the Franchise Tax Board (FTB) may prescribe  
            rules, guidelines, or procedures necessary or appropriate to  
            carry out the purpose of this bill.


          9)Provides that the Administrative Procedure Act (Government  








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            Code Section 11340 et seq.) shall not apply to any standard,  
            criterion, procedure, determination, rule, notice, or  
            guideline established or issued by the FTB under this bill.


          10)Provides that the provisions of this bill shall remain in  
            effect until December 1, 2021, and as of that date is  
            repealed.


          11)Provides that it is the intent of the Legislature to make the  
            findings required by Revenue and Taxation Code (R&TC) Section  
            41.


          12)Makes findings and declarations.


          13)Takes effect immediately as a tax levy.


          EXISTING LAW:  


          1)Allows individuals to deduct certain expenses, such as medical  
            expenses, charitable contributions, interest, and taxes as  
            itemized deductions.  Other expenses from the production of  
            income and certain employee business expenses are considered  
            miscellaneous itemized deductions.

          2)Allows for an "above-the-line" deduction for certain expenses  
            when calculating adjusted gross income.  These expenses  
            include expenses and interest on education loans, certain  
            ordinary and necessary trade and business expenses, losses  
            from the sale or exchange of certain property, contributions  
            for pension, profit-sharing and annuity plans of self-employed  
            individuals, retirement savings, and alimony.  Thus, all  
            taxpayers with these types of expenses receive the benefit of  
            the deduction, regardless of whether the taxpayer itemizes  








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            deductions or uses the standard deduction. 


          3)Requires any bill authorizing a new PIT credit to contain all  
            of the following: 


             a)   Specific goals, purposes, and objectives that the tax  
               credit will achieve;


             b)   Detailed performance indicators for the Legislature to  
               use when measuring whether the tax credit meets the goals,  
               purposes, and objectives stated in the bill; and,


             c)   Data collection requirements to enable the Legislature  
               to determine whether the tax credit is meeting, failing to  
               meet, or exceeding those specific goals, purposes, and  
               objectives. The requirements shall include the specific  
               data and baseline measurements to be collected and remitted  
               in each year the credit is in effect, for the Legislature  
               to measure the change in performance indicators, and the  
               specific taxpayers, state agencies, or other entities  
               required to collect and remit data.  (R&TC Section 41.)


          FISCAL EFFECT:  The FTB estimates that this bill will reduce  
          General Fund revenue by $21 million in fiscal year (FY) 2016-17,  
          $22 million in FY 2017-18, and $22 million in FY 2018-19.


          COMMENTS:  


           1)Author's Statemen  t.  The author has provided the following  
            statement in support of this bill:










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               The education tax relief provided under AB 1371 would  
               empower and engage parents to personally care for their own  
               school children's K-12 learning needs - which they know  
               most intimately.  AB 1371 would benefit California's school  
               children, but it giving vital support to low-income,  
               working- and middle-class families.  Such tax relief for  
               citizens who shoulder an extra weight in pursuit of our  
               common good has long been considered sound public policy.   
               In 1983, the U.S. Supreme Court ruled that such education  
               tax relief programs are constitutional.





               AB 1371 would allow families with incomes of 250 percent  
               above the Reduced Price Lunch Program guidelines or less to  
               take a $2,500 above-the-line deduction from their gross  
               income for K-12 educational expenses.  For example, a  
               family of four that brings in $110,000 per year or less  
               would be eligible for this deduction.  Educational expenses  
               would include tutoring, computer hardware and educational  
               software, diagnostic evaluations, special education  
               services, academic after-school programs, textbooks and  
               school supplies, uniforms, and transportation.


           2)Arguments in Opposition  :  the American Federation of State,  
            County and Municipal Employees states that "[e]ducation is one  
            of AFSCME's paramount concerns.  With that being said, AFSCME  
            opposes AB 1371 because though it is a noble attempt to aid  
            low-income families, it falls dramatically short of truly  
            fulfilling its purpose."


           3)Proposition 30  .  In general, Proposition 30 increased the  
            marginal tax rate for those making above $250,000 and  
            increased the statewide sales tax rate from 7.25% to 7.5%.   
            Proposition 30 was estimated to increase General Fund revenue  








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            by about $6 billion per year, which would primarily be used to  
            restore funding to California's public school system.  The  
            provisions of this bill are meant to counteract the lack of  
            funding once available to K-12 education.  Specifically, this  
            bill seeks to remedy the fact that many schools are unable to  
            provide school supplies and books.  However, as noted in the  
            Governor's Budget Summary, the budget for FY 2014-15 provides  
            $61.6 billion in Proposition 98 funding, an increase of $6.3  
            billion over the 2013 budget act level.  It appears that new  
            revenues, provided in part because of the passage of  
            Proposition 30, have translated into additional funding for K  
            through 12.


           4)Is This Bill Needed  ?  The California Supreme Court ruled in  
            Hartzell v. Connell (1984) 35 Cal.3d 899, 201) that pupil fees  
            violate the constitutional right to a free education.   
            Specifically, the court ruled that extracurricular activities  
            also must be free because they are an integral component of  
            public education and a part of the educational program.  In  
            September 2010, the American Civil Liberties Union (ACLU)  
            filed a class action lawsuit alleging the unconstitutional  
            assessment of pupil fees by school districts [Jane Doe, et al.  
            v. State of California, et al., (Super. Ct. Los Angeles  
            County, 2010, BC445151)].  The lawsuit was brought forward  
            because ACLU reports showed that more than 50 public school  
            districts required pupils to pay fees for textbooks,  
            workbooks, science labs, physical education uniforms,  
            classroom materials, and extracurricular activities.  Instead  
            of moving forward with the lawsuit, the ACLU and interested  
            parties sought a legislative solution.  As a result, AB 1575  
            (Lara), Chapter 776, Statutes of 2012, which was sponsored by  
            ACLU, codified the long held constitutional prohibition on the  
            imposition of pupil fees and established procedures to ensure  
            compliance with the prohibition.

            Since the passage of AB 1575, many schools have stopped  
            imposing fees for participation and, in some cases, are paying  
            for items that were traditionally paid for by pupils and  








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            parents.  Most recently, school districts have informed  
            parents that caps and gowns will be provided free of charge.   
            Within the last year, parents throughout California have been  
            utilizing compliance procedures to challenge school districts  
            that require families to pay for Advanced Placement exams,  
            classrooms supplies, workbooks, and school uniforms.  (Loretta  
            Kalb, California to Schools:  Student don't have to pay for  
            graduation attire, other items 'integral' to education,  
            Sacramento Bee, May 7, 2014.)  In some cases, parents and  
            activists are even challenging "supply lists" posted by school  
            for returning student.  One parent, in the San Juan School  
            District, received a letter outlining a list of supplies that  
            children would need at the beginning of the year.  The list  
            included items such as tissue paper, binders, pencils and  
            pens.  The supplies cost parents between $70 and $100.  In  
            response to the challenge to required supplies, the school  
            notified parents that all necessary materials will be provided  
            to school children and that "supply lists" are suggestions,  
            not required for full participation.  Schools across  
            California have begun making similar changes to "required"  
            items and fees that are imposed on pupils.  In most cases,  
            schools have stated that items will be provided free of  
            charge.


           5)Private School Subsidy  .  The "above-the-line" deduction for  
            education-related expenses applies to both private and public  
            schools.  Education-related expenses include computers,  
            computer hardware, out-of-school enrichment programs, and  
            third-party transportation to expenses for traveling directly  
            to and from school.  The Committee may wish consider whether  
            subsidizing private educational courses and private  
            transportation is an appropriate use of public funds.


           6)Performance Measurement Standards  :  Existing law requires any  
            bill, introduced on or after January 1, 2015, that would  
            authorize a new credit under either the PIT Law or the CT Law  
            to provide performance measurement standards.  According to  








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            legislative findings and declarations, tax preferences  
            represent a major exercise of government power, but face less  
            oversight than the spending side of the budget.  As a way of  
            ensuring transparency and accountability when investing public  
            dollars through tax credit programs, the Legislature decided  
            to apply performance measurement standards as a way of  
            reviewing tax credits with the same level of scrutiny as  
            spending programs.  This bill states that legislative intent  
            to make the findings required by RT&C Section 41.  However,  
            this bill provides an above-the-line deduction, not a tax  
            credit.  Therefore, the performance measurement requirements  
            established under R&TC Section 41 do not apply.


           7)The Administrative Procedure Act  :  This bill provides that the  
            Administrative Procedure Act shall not apply to any rule,  
            notice, or guideline established by the FTB pursuant to this  
            bill.  It is not clear to Committee staff why an exemption  
            from the Administrative Procedure Act is necessary in this  
            instance.


           8)Previous Legislation  :  AB 1786 (Olsen), of the 2013-14  
            Legislative Session, would have allowed an "above-the-line"  
            deduction for the cost of education-related expenses of the  
            taxpayer's dependent child attending public or private school,  
            not to exceed $2,500.  AB 1786 was held on this Committee's  
            Suspense File.


          REGISTERED SUPPORT / OPPOSITION:




          Support


          None on file








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          Opposition


          American Federation of State, County and Municipal Employees


          California Tax Reform Association




          Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)  
          319-2098